Recession spells cheap carbon credits

Tags:

– Amanda Williams Palmer is the editor of Reuters’ European Venture Capital and Private Equity Journal (EVCJ). The opinions expressed are her own. —

Steel giant ArcelorMittal has shut down furnaces at a dozen sites across Europe for at least six months as its customers, mostly automakers, downsize because of the economic downturn. While environmentalists crack into the bubbly, serious polluters realize that carbon is about to get a whole lot cheaper. And cheap carbon is only bad for the environment.

ArcelorMittal and many other industrial manufacturers are busy selling surplus carbon credits in order to raise short-term cash, flooding the market where polluters trade EU Carbon Allocations (EUAs). Under the Kyoto agreement, companies need a certain number of EUAs in order to pollute. So ultra dirty European utilities, which face huge carbon shortfalls and have been slow to adopt cleaner methods, are buying those credits for a song.

EUA prices have fallen from their 1 July peak of €29.33 ($37) to a low on 28 October of €17.40 ($22), said Alessandro Vitelli, director of strategy at IDEACarbon, a carbon finance ratings agency. “The price implications of the recession are already being seen,” he said.

The low price of carbon also discourages hedge funds and private equity funds from investing in companies that reduce emissions. These funds aim to profit from a type of carbon credit called a certified emission reduction (CER). CERs are issued by the United Nations to developing world companies that are removing pollutants from the environment.

Many of these companies are backed by private equity and hedge funds and it is this type of business which may suffer most in the downturn because CERs typically trade at a €1 to €2 discount to EUAs.

The Carbon Asset Fund, backed by Carbon Capital Markets, is one such fund. It invests in projects across the developing world, especially in Central and South America and South East Asia. The companies that it supports specialize in destroying methane created by landfills by flaring it or turning it into energy. These companies are rewarded with CERs by the UN.

“There is always the fear that in the current financial situation the instinct is to ignore the environmental problem,” said Nick Eagle, the director of sales and trading for Carbon Capital Markets. “But the current credit crunch is short term in comparison with the issue of global warming.”

That may be, but for some financial sponsors, the price falls have only underlined their concerns about carbon investing. Impax, which runs a green hedge fund and a private equity fund, has shied away from investments in CER businesses because “we’ve seen a waterfall of risks including the most recent fall in the price” said CEO Ian Simm.

Despite some short-term carbon emissions cuts, the domino effect the economic downturn will have on the cost of carbon credits threatens the long-term health of the environment.

(Pictured above: Smoke is emitted from a factory at Keihin industrial zone in Kawasaki, south of Tokyo October 22, 2008. REUTERS/Kim Kyung-Hoon)

In contrast a tax on the fossil carbon content of all fuels would be easy to administer and have no loopholes associated with fluctuations in demand. A tax of $35 per ton of fossil carbon would immediately make clean power sources such as nuclear, wind, geothermal and Solar economically competitive without subsidies.

Nowadays, it is very difficult to make forecasts in terms of price for carbon credits, especially when you are trying to work out what the price will be like in 2011-2012. The article is quite useful, it’s explaining the current situation. But can we accept the forecasts of specialists, saying that the price for CER in 2012 will be 20 euro or even more?
Sure, we are all waiting for Kyoto Protocol second commitment period, hoping for the best. But it might be a good trap for those who are not willing for Futures trading, and waiting for the CER/ERU issuance in 2012.
From one side, they can win in price, nobody knows.
From the other side, the Second Commitment period will mean the discount of all the quotas for the first commitment period, as it is now regarding quotas issued before 2008. This may cause the price breakdown – lots of companies will be waiting for 2012, and as the result we will get the demand lower, than the amount of quotas, put on the bid of the stock markets. The price can fall to 5 euro and even less.
As Jack Schwager used to say: “If you think that you are smarter than the market – you might be out of your mind”. So we know where we are today, but what will be tomorrow – the market will show.